Indonesia's Red Tape Cleanup: Wait and See

Indonesian President Joko Widodo, who last week sent his entire cabinet to the city of Bogor for a three-day conclave aimed at cleaning up red tape that restricts economic growth, has released a package of revisions to 89 regulations deemed to be detrimental to the business climate.

The regulations are aimed primarily at simplifying the process for companies to obtain business permits, streamline the bureaucracy and reduce the potential for misconduct by a notoriously corrupt government. The central bank also announced a set of reform policies including changing the auction mechanism for its debt-paper issuances to make them more attractive to investors and pump up liquidity.

Unfortunately, the package has been met coolly by the business community, who say the package’s impact will only be felt in the medium to long term. The Jakarta Composite Index remained flat.

"It needs to go much deeper and quicker," said a western analyst. "Investors need changes in tax collection to rescue harassment of multinationals, clear and understandable investment incentives in the form of land and easily given tax breaks and some big-ticket wins on contract certainty,”

The World Bank’s July economic report says that Indonesia “remains confronted with an uncertain external environment, and domestic economic policy challenges have intensified.” With falling demand for Indonesian coal, crude and palm oil, policy responses have affected growth in the resource-rich provinces. The second-quarter GDP growth of 4.67 percent was the slowest pace since 2009, amid weak global commodity prices and anemic domestic spending.

The chronic current account deficit has narrowed, unfortunately not because of strong exports but because consumers have cut back on purchases because of continuing growth moderation. Foreign direct investment and foreign deposits have both fallen, at least in part because of the recent continuing bout of economic nationalism that have made it difficult for multinationals to operate in the country – at the same time the president has been cruising Asia, pleading with investors to come in to the country.

He is due to go to Washington, DC and California in October to seek to make the case to American investors and government that the atmosphere is changing. A strong package modifying investment rules is at least partly designed to deliver an image that he is righting what so far during his presidency has been a listing ship.

That hostility to multinational investment is one of the factors that impelled the president to move to clean up the regulatory restrictions.

“…The scope for policy stimulus is limited and monetary policy in particular is constrained due to sticky inflation and persistent external vulnerabilities,” according to the World Bank. The rupiah has been on a steady three-year slide, hitting RP14,223:US$1, the lowest level in 17 years.

Nonetheless, Jokowi, as the president is known has been on a whirlwind of activity over the past few weeks, cashiering two lackluster cabinet appointees, driving out a corrupt police general, and taking other actions that have renewed interest, if not action, by international investors.

“Indonesia is out of favor as a stock market and an investment home among portfolio managers,” according to a recent report by Jim Walker, the head of the Hong Kong-based Asianomics financial advisory firm. “We understand the concerns over the currency and the current account but depreciations in places like Indonesia have a habit of righting the ship quickly. We would recommend hopping on board for a year-end rally and strengthening outlook into 2016.”

Jokowi appears to be freeing himself from the coils of Megawati Sukarnoputri, the head of the Indonesian Democratic Party of Struggle (PDI-P, the party to which the president belongs and which sponsored his run for the presidency in 2014. For nearly a year, Megawati has sought to dictate cabinet and other government appointments that would guarantee the PDI-P the traditional spoils of electoral office in Indonesia.

Nonetheless, the government is struggling against a hide-bound bureaucracy that tends to get in the way of policy initiatives rather than carrying them out.

“The package is for the medium to long term,” Erick Alexander Sugandi, a former economist with Standard Chartered Bank and now chairman of international economics at the main opposition Great Indonesia Movement Party (Gerindra), told local reporters. “We can’t expect fast results. Don’t expect too much, it needs time, The package doesn’t directly help propel consumer purchasing power, but rather offers more incentives to investors.”